Export-reliant Sweden's avoidance of the worst problems of the eurozone crisis may have come at a price: A strong crown risks dampening economic growth by dragging on exporters, who need a favorable exchange rate.
The economy has been steadily slowing, and growth this year is set for a relatively anemic 1 percent, according to the central bank.
After the crash following the collapse of Lehman Brothers, Sweden bounced back quickly. It grew 6.6 percent in 2010.
A major factor in that rebound was a fall in the currency. Sweden gets about half its gross domestic product from exports.
It is a very different climate now. Seeking a refuge from eurozone trouble, investors have poured into the crown, driving up the currency's market value and hitting growth accordingly.
"In 2009, 2010 and a little way into 2011 we had a lot of help from a weak Swedish crown that let us take market share in the eurozone countries," said Santhe Dahl, chief executive of VIDA, Sweden's biggest privately owned timber sawmill, which exports around 80 percent of production to the rest of Europe, the United States and Asia.
"That has slammed back the other way now," he said.
The annual average rate of the crown against the euro in 2005-2010 never fell below 9.2 and at its weakest stood at 11.6 in 2009. On a trade-weighted basis, the crown also weakened sharply after the collapse of Lehman in 2008.
By contrast, the crown was at around 8.7 to the euro on Tuesday, matching its 2012 average. The trade-weighted TCW-index has strengthened to 118 points from around 156 in March 2009 — roughly 25 percent.
Stefan Folster, chief economist at business lobby Svenskt Naringsliv, reckons a 5 percent rise in the crown in trade-weighted terms knocks 0.3 percentage points off GDP growth.
DOUBLE EDGED SWORD
The crown's unusual strength has come partly because global investors have been attracted by robust public finances and an AAA debt rating.
The strong fundamentals have meant borrowing costs have remained low and Swedish banks and businesses have retained access to funding, in contrast to rivals in weaker countries.
"In this new world, where the crown is a quality currency, it doesn't fall to pieces in the shape of a major weakening," said Swedbank economist Cecilia Skingsley.
But with Swedish companies already facing labor costs that are the second-highest in Europe, according to 2011 Eurostat data, the currency just adds to exporters problems.
The weakening economy and additional headwind from the crown pushed redundancy notices up to their highest level in more than three years in October, though the flood eased somewhat in the final two months of the year.
Unemployment, at 7.5 percent in October, is seen peaking at around 8.5 percent, still lower than most of Europe. But it is high for a government that has held power for six years by promising more jobs and better growth.
"Many smaller Swedish companies have manufacturing in Sweden but largely sell to the rest of Europe and they are having a rough time," said Nordea Equity Strategist Mattias Eriksson.
A central bank survey from October last year showed then that in some export sectors profitability was under strong pressure due to the stronger crown and that those firms were planning "extensive rationalization and cost-saving measures."
Little is expected to change at the moment.
Unlike Switzerland, where a surging franc has led to a currency cap, Sweden's central bank has shown little sign of concern about crown strength, which has been kept despite three rate cuts last year and likely further policy easing in 2013.
The main interest rates are currently 1.00 percent.
Central bank Governor Stefan Ingves said last year it was very unlikely the bank would intervene. Indeed, the bank last intervened — to try to strengthen the crown — in 2001.
Nor is Finance Minister Anders Borg likely to hurt his record for prudence with a spending spree, even if he said last week he would like a weaker currency.
The Riksbank reckons the crown will stay at its current trade-weighted level this year and strengthen in 2014 and 2015.
It is no surprise, then, that Swedish purchasing managers are among the gloomiest in Europe.
"If core markets are weak for export companies and in addition the crown remains comparatively strong, the hit is a combination of a volume impact and difficulties in profitability due to the crown," said Danske Markets analyst Michael Grahn.
All that is left for companies is to explore how they can reduce costs, negotiate with unions to keep wage rises in check and hope for legislation to make life easier for businesses so they can remain as competitive as possible.
"We are really looking at every expense, every little detail, down to the amount of cookies for coffee. That is simply the way you have to deal with this," said sawmill chief Dahl.
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